ISDS: The most toxic acronym in Europe

There must have been some nervous people at the International Sheep Dog Society when the European Union’s trade commissioner flew into Washington recently and declared “ISDS is now the most toxic acronym in Europe.”

Fortunately for shepherds everywhere, Cecilia Malmström was not suggesting the continent is turning against its canine companions.

She was instead recognizing a public outcry over a once-obscure element of international trade agreements known as Investor-State Dispute Settlement.

That very same ISDS is jeopardizing efforts by the EU and United States to create the world’s largest free trade zone — a $34 trillion market stretching from Honolulu to Helsinki — and stands as a potential key stumbling block for TTIP negotiations.

Opponents of the transatlantic trade pact have made it their top target, claiming it gives multinational corporations a stranglehold over elected parliaments and national courts.

Democracy on the block?

“ISDS works like a global legal straightjacket that makes it very, very difficult and expensive for governments to regulate corporations … It is dangerous for democracy,” claims Pia Eberhardt, of Corporate Europe Observatory (CEO), a Brussels-based campaign group.

The system works by allowing foreign investors to turn to private arbitration tribunals if they believe they’ve been unjustly treated in countries where they’re established and are unlikely to get a fair hearing in domestic courts.

ISDS clauses are not new. They’ve been written into trade deals since the 1950s and are incorporated into over 3,000 international agreements. Almost half of them include EU member countries.

Companies have been turning to them increasingly. There were record years in 2012 and 2013 with over 50 cases registered by the United Nations Conference on Trade and Development (UNCTAD). Eberhardt says many more are held secretly.

Complaints are decided in secret by panels of lawyers specialized in commercial law. Most cases are heard under rules laid down by the UN Commission on International Trade Law, the World Bank or International Chamber of Commerce.

“ISDS arbitration is needed because the potential for bias can be high in situations where a foreign investor is seeking to redress injury in a domestic court,” says an explainer on the website of the U.S. Trade Representative.

It goes on to point out that such civilized methods are so much better than the old days when the U.S. would have to use “gunboat diplomacy” — sending in the Navy — to protect American commercial interests abroad.

Opponents argue ISDS panels are slanted towards corporations. TTIP critics say they allow multinationals to ride roughshod over national legislation and even constitutions, while deterring authorities from passing laws in areas like health and the environment through fear of incurring multibillion-dollar compensation claims.

A number of recent cases have highlighted those concerns.

In 2011, Australia introduced some of the world’s toughest legislation on tobacco packaging. It obliged manufacturers to remove all branding and sell cigarettes from plain brown packs dominated with grisly health warnings.

Tobacco companies attempted but failed to overturn the legislation in Australian courts. Then Philip Morris tried another tack. It unearthed an ISDS clause in a 1993 trade agreement between Australia and Hong Kong — where Philip Morris Asia is based — and sued the Australian government.

The case is still pending, but Australian media estimate taxpayers are having to fork out the equivalent of €34 million in lawyers fees for just the first phase of the litigation.

In Europe, Swedish energy company Vattenfall is seeking €5 billion compensation from theGerman government over its decision to phase out nuclear power following the 2011 Fukushima radiation leak in Japan.

Canada’s Lone Pine Resources Company is using a U.S. subsidiary to sue its own government for $230 million under ISDS provisions in the North American Free Trade Agreement (NAFTA). That’s in response to a provincial authority in Quebec calling a moratorium on fracking for natural gas under the St. Lawrence River.

Such cases help explain mounting concern among the public and politicians on both sides of the Atlantic over ISDS provisions in the TTIP negotiations.

Emotions are particularly strong in Europe, where there’s already widespread unease in some countries over the impact TTIP could have in areas ranging from privacy to labor laws and genetically modified organisms.

New legal system

“Germans are distrustful of this kind of arbitration,” says Claudia Schmucker head of the Globalization and World Economy Program at the German Council on Foreign Relations in Berlin.

“ISDS is one of the things most contested (in TTIP), together with data privacy and GMOs,” she added. “It’s at the center of everything, this fear that companies could find a way in through the back door to lower standards and interfere with legislation.”

The level of opposition in Germany has taken EU trade officials by surprise, given that the Federal Republic was behind the first-ever ISDS when it concluded a two-way trade deal with Pakistan in the 1950s.

However the sheer size and scale of TTIP has combined with the Edward Snowden espionage revelations to raise angst over America’s intentions.

Eminent German legal experts have questioned whether ISDS as proposed under TTIP is compatible with the federal constitution.

In the U.K., there’s particular concern among trade unions and the opposition Labour Party that TTIP could allow a Conservative government to sell off bits of the cherished National Health System, or other public services, to American investors. And that prohibitive ISDS compensation claims could deter future attempts to bring them back under public control.

European politicians are responding to the public disquiet.

The French and German governments have suggested alternatives that would limit the circumstances in which firms could turn to arbitration and replace the secretive lawyers’ panels with a permanent international court to hear investor complaints in public.

“The ISDS as it stands cannot be the standard for dispute resolution,” French Trade Secretary Matthias Fekl told a recent Brussels news conference. “We need to invent a totally new mechanism that’s adapted to current international trade realities and able to restore balance between states and businesses.”

In July, the European Parliament — which has the power to reject any final TTIP agreement — voted in favor of continuing negotiations with the U.S., but insisted on bold action to reform investor protection rules.

The resolution called for the ISDS system to be replaced by a dispute mechanism run by independent professional judges holding public hearings, respecting national laws, and offering the prospect for states to appeal.

In response, Malmström on Wednesday presented a new European Commission proposal to replace ISDS panels with a dispute mechanism run by independent judges and operating in public. National rights to legislate will be “fully respected and enshrined in black and white,” she insisted.

“There has been, and is, a fundamental lack of trust by the public in the fairness and impartiality of the old traditional ISDS model,” she told a news conference in Brussels. “It is logical that we, from the EU side, take the lead in reforming and modernizing this system.”

Malmström’s proposed Investment Court System (ICS) for TTIP would have a pool of judges appointed by the EU and U.S., who would be picked at random for individual cases and be checked for any potential conflict of interest. An appeals mechanism would be introduced.

While some TTIP campaigners welcomed the proposal as a victory for anti-ISDS protesters, others said the changes did not go far enough. Even before Malmström had finished speaking, critics were tweeting that the new ICS would mean “Imposing Corporate Sovereignty.”

The Commission’s problem is how to satisfy both European ISDS-skeptics and the U.S. Negotiators on the American side insist sufficient safeguards have already been built into the modern ISDS regimes and are less than from enthusiastic about the permanent tribunal idea.

U.S. Trade Representative Michael Froman is under pressure from business to keep existing investor protection.

“This vote was aimed at Europe’s top economic partner and largest source of foreign investment,” Sean Heather, vice president of the U.S. Chamber of Commerce’s Center for Global Regulatory Cooperation, complained after the European Parliament’s resolution to drop ISDS. “It underscores why American investors need investment protection and a meaningful ISDS mechanism to be at the core of any transatlantic agreement.”

European businesses are also wary of scrapping ISDS. Froman likes to point out that EU-based companies are the most common complainants under the system.

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The TPP is a stupid agreement for poor old Joe Average. It will mean higher taxation as our governments get sued for protecting our ecology. If it goes through we will have to think of other ways to get around it. The trouble is that our governments around the world are just shills for multi-national corporations. We are leaving our young people hanging out to dry. We ought to be totally ashamed our ourselves for what we are doing to this planet. Fools are at the helm and seem to be
all set to drive us all under.